Where will China's long march end?

China has gone past Japan to become the world's second largest economy, and is
closing in on the United States. But it faces challenges ahead, writes Peter
Foster.

Honour guard: China spends as much on its internal security as it does on its armyPhoto: AFP/Getty Images

By Peter Foster

7:24AM BST 18 Aug 2010

It’s official. Dice the data any way you please, China has now eclipsed Japan as the world’s second-largest economy. And if it keeps up its current rate of double-digit, pell-mell growth, it will surpass the US as the world’s largest economy by 2020.

Of course, these are artificial benchmarks: if you take into account China’s “grey market”, its economy passed Japan’s some time back. But almost every day seems to provide more evidence of how far and how fast China’s rise is reshaping the world, to offer more reasons to believe that China’s emergence as a world power is inexorable and inevitable.

The facts are no less impressive for their familiarity. China now buys more cars than gas-guzzling America, and exports more goods than Germany, the manufacturing powerhouse of Europe. As Western governments fret over their cavernous deficits, Beijing continues to pile up its mountainous surpluses of foreign exchange. And it is not just economically that China is on the march: as we report today, despite the fact that Beijing spends just a tenth of the American total on its armed forces, the Pentagon’s annual report has warned this week of its growing hard power, describing ship-building programmes and “carrier-killing” missiles that threaten to erase the strategic superiority that America has maintained on the high seas for 50 years.

This seductive and persuasive narrative of Western weakness and Chinese strength has been fuelled in part by our own insecurities – after all, the financial crisis has given us good reason to question our own economic model. But before we throw up our hands in defeat, it is worth remembering that we have been somewhere like this before.

Twenty years ago, it was Japan, another export-reliant economy, that was going to “rule the world”, just as China is today. Such was the paranoia in the early 1990s that people were taking sledgehammers to Sony stereos in the street and American columnists were penning serious analyses of a book entitled The Coming War with Japan.

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We all know what happened next. Japan’s property market imploded and its economy suffered a lost decade – now two decades – as its policy of using state-led investment to perpetuate economic growth simply ran out of steam.

There are no crystal balls when it comes to predicting whether China will follow a similar trajectory – but while the potential for sustaining its growth is certainly greater than Japan’s, given its vast population and resources, there are good reasons to question whether the predictions of global dominance might be somewhat premature.

It should go without saying, at this point, that China’s achievements in the 30 years since Deng Xiaoping began unravelling the economic and political madness of the Mao years are real and significant. Country lanes have become motorways, villages have become towns, and towns have metamorphosed into shimmering megacities whose factories have changed the dynamics of global commerce. In the process, hundreds of millions have been lifted out of poverty.

So far, so good – but if this remarkable growth is to be sustained, the country’s leaders will have to overcome a set of challenges that makes the last 30 years seem like one of the late Chairman Mao’s picnics on the banks of the Yangtze.

To the outside world, China’s stony-faced leaders might appear supremely self-confident, even arrogant of late. But viewed from the inside – and China’s leaders still instinctively look inwards – their place in the world starts to seem increasingly insecure.

Economically, China is already starting to hit the limits of a growth model that has relied on massive public investment in infrastructure, a vast pool of cheap labour and an insatiable appetite for cheap goods among Western consumers.

Thanks to the one-child policy, China’s working-age population will start to shrink from 2015. Also, now that the financial crisis has slashed the West’s credit-fuelled spending power, exports aren’t a long-term option any more.

Furthermore, China knows that it can no longer afford to ignore the environmental costs – social and economic – of its rampaging growth, which has poisoned half its rivers and shrouded its cities in clouds of industrial smog which will cost billions in healthcare bills down the line.

Beijing’s rulers know they must take steps to rebalance the economy by fuelling demand at home. But for all the hype about Chinese millionaires buying Mercedes cars and Louis Vuitton handbags, a country with a GDP of £2,500 per head is still a very long way from having a consumer base that can take the strains currently being put upon it by the global economy.

To make that transformation, China must force its way up the global value chain, moving away from cheap exports and educating a new army of technically proficient workers. Again, there is much hype about China’s vast legions of chemists and engineers, but for now, their quantity is not matched by their quality. The country’s comparatively unreformed education sector may have realised Mao’s dream of almost universal literacy, but it remains poorly equipped for the modern world, as shown last week by the international university rankings published by China itself.

According to Shanghai Jiao Tong University, of the best 100 colleges in the world, 54 are in the United States. China’s own elite institutions – Tsinghua and Peking universities – do not appear until the lower reaches of the top 200.

And China’s model of growth, admired as a “miracle” in the West, has also created deep political problems for its leaders, which it is far from clear that the innately conservative Communist Party has the vision or the daring to overcome.

Where the West sees only a market opportunity, China’s leaders are daily confronted by the social consequences of an economical model that, ironically for a nominally Communist state, has made the rich very rich, but the poor relatively poorer.

Deng Xiaoping might have said “Let some people get rich first”, but that maxim has been taken to a dangerous extreme: between 1983 and 2005, the proportion of China’s wealth comprised of wages and salaries fell from 56.5 per cent of GDP to 36.7 per cent. This growing disparity has gained little attention in the West, but is the reason why Beijing has become so fearful of unrest among its own people that it now spends as much on its internal security as its army.

A spate of knife attacks at kindergartens this year, the increasingly bold and youthful strikers seen at many factory gates and the growing numbers of jobless graduates (a third of the six million leaving universities this year) are all symptoms of a political system under massive strain.

At the very point that the world is fixated on the country’s rise, long-term China hands say they haven’t seen such fear in the upper echelons of the Communist Party since the dark days of 1989.

China’s authoritarian system is often cited as one of the key factors behind its success – and not just by its own rulers and commentators. But of late the leadership has been exhibiting increasing signs of paranoia, harassing lawyers, deepening internet censorship and locking up dissidents such as Liu Xiaobo, a human-rights activist who received an 11-year sentence in December for circulating a pro-democracy petition.

For now, China rejects democracy as a luxury it cannot afford. But the record of the other successful Confucian states in East Asia that have made the leap up the global value chain – Japan, South Korea, Taiwan and Singapore – would suggest that it cannot do so for ever.

China may have surpassed Japan’s economy, but its leaders, with their strange mix of arrogance and insecurity, know the mountain they have to climb better than anyone. As Japan’s own painful experience shows, there are no guarantees that they will reach the summit.